The region experienced decisive additions to oil and gas capacity in 2018, with soaring natural gas production in the Marcellus and Utica basins outpacing the infrastructure required to move it to market

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This year's CERAWeek confab in Houston marked the latest round in the running Opec vs shale battle. This time around could hardly be more different from two years ago, when Opec was putting the squeeze on the shale industry by flooding the market and sending prices into freefall.

Last year, the Saudi oil minister Khalid al-Falih warned his shale counterparts against "irrational exuberance", saying Opec's cuts wouldn't underwrite tight oil growth indefinitely. This year, the shale industry is as confident as ever, having weathered the storm and emerged with a strong tailwind at its back.

Tight oil has found a sweet spot at $60 a barrel. The price is high enough to underpin ambitious drilling plans that can deliver double-digit growth. The oil rig count is up nearly 10% since the start of the year, hitting 800 for the first time since early 2015. Most of that growth has come from the Permian. Thirty-four oil rigs were added in the first quarter of the year in the West Texas basin, more than in the six months before that.

At the same time, $60/b oil has allowed shale companies to at least partially answer calls from their frustrated investors to start returning cash back to shareholders. The most recent round of quarterly results saw shale executives pledge billions of dollars in share buybacks and new dividends, a sharp break from the past when every available dollar went back into drilling.

Production on the up

Shale producers have also been able to fend off cost inflation. The market for rigs, horsepower and frack crews has so far remained lax. Costs have ticked up since the nadir in 2016, but breakevens have remained low. The best parts of the best basins can make money with oil in the $30s, but even more marginal areas can be drilled profitably with oil in the $60s, at least on a wellhead basis. That's not taking into account broader costs around managing the business and acquiring land. Some executives, like Pioneer Energy's boss Tim Dove, talked of the shale business' permanently lower cost base.

Executives also see further productivity and efficiency gains in the pipeline. Producers see the learning curve on drilling flattening out. Wells that used to take 20 days now take just six, and there's only so much further that can fall, if at all. However, companies continue to experiment with longer lateral wells and more intense frack jobs, which have yielded more economic wells. The average Permian lateral well, for instance, is around 7,000-8,000 feet (2,100-2,400 metres)—twice what it was just a couple of years ago. But wells drilled 10,000 feet (2,400 metres) and further have shown promise and drillers will continue pushing in that direction.

A raft of bullish new projections for tight oil's future hit the market as the oil chieftains converged on Houston. The International Energy Agency (IEA) unveiled its latest US forecast at CERAWeek, predicting US production, led by tight oil, will jump from 13.2m barrels a day in 2017 to 17m b/d by 2023, accounting for two-thirds of global production growth. Over the next three years, the IEA argues, tight oil alone will meet 80% of demand growth. The Energy Information Administration's latest forecast sees crude output jumping 1.3m b/d over the course of 2018, though, unlike the IEA, it sees a deceleration in 2019.

At the same time, Chevron and ExxonMobil, America's richest supermajors, announced bold plans to expand their tight oil businesses in the Permian. Chevron bumped up its total resources there, to 11.2bn barrels of oil equivalent. It also lifted its production growth target, from around 200,000 boe/d now to around 500,000 boe/d by 2020 and nearly 700,000 boe/d by 2023. ExxonMobil plans to triple output to 600,000 boe/d by 2023 and is steadily adding rigs in the basin.

All of this infused the talk around shale at the conference with an extraordinary amount of optimism. A little too much for the few naysayers. John Hess, whose company is active in the Bakken but not the Permian, warned of "irrational exuberance" at home in the US around shale and "irrational fear" abroad.

The most forceful voice of caution, however, was Mark Papa, a shale pioneer who headed up EOG Resources before taking over the helm at Centennial Resources. Papa used his appearances at CERAWeek to tick off a string of potential traps that could snare the shale juggernaut.

Financial markets, Papa warned, had turned against the shale sector after years of "destroying value" and would no longer be underwriting explosive growth. Companies will have to curb some growth to deliver better returns, he argued.

Returns are paramount

Reflecting on his own experience with institutional investors, he said missing on returns targets a few years ago would get a shale executive a tongue lashing from major shareholders; but as long as they delivered on growth all was forgiven. No longer. Now, said Papa, the message he hears is: if you miss on returns "we will destroy your valuation and never own your stock again". Asked if Papa himself would invest in the industry, he demurred saying he'd have to think hard about it given the dismal track record, a stunning statement from one of the sector's most high-profile executives.

'Companies will have to curb some growth to deliver better returns'

He also cast doubt on the industry's claims to have made significant and lasting technological breakthroughs, saying most of the productivity gains in recent years came instead from companies simply drilling on the best of their acreage. This was especially problematic because it meant some of the best wells were drilled when prices were low and returns weak, said Papa.

Papa also pointed to "resource exhaustion" in the more mature Bakken and Eagle Ford shale plays, where output hasn't recovered since the downturn the same way it has in the Permian. "A lot of capital will go into those plays, but output will disappoint," said Papa.

He warned, too, that even the mighty Permian could let down investors. A number of major new pipelines will be needed in the next couple of years to take away the vast amounts of oil and gas. Markets will be needed to absorb the production as well.

Layers of problems

The Permian's rocks may not live up to the hype either, thanks to a phenomenon known as parent-child well interference. Part of the excitement around the Permian's huge potential is the fact that there are multiple shale layers stacked on top of each other, making acreage far more productive than in other shale plays.

Left with few options: OPEC Secretary General Mohammad Barkindo - Source: CERAWeek 2018 by IHS Markit

Companies are counting on being able to produce from all of these layers. But recent data from Permian players indicate that producing from one layer—the parent—could significantly reduce pressure in the other layers—the children—making them less productive and profitable than previously thought. Although not well understood yet, the phenomenon could affect billions of barrels in resources across the Permian and affect long-term production. "It's very significant and hasn't been factored in," said Papa.

Papa's bearishness no doubt appealed to the Opec ministers in attendance. But for the most part, Opec has come to accept that there's little it can do to head off shale growth, at least not without inflicting unacceptable blowback on itself. After the tough talk of the past couple of years, Opec secretary-general Mohammed Barkindo's message this year was kinder and gentler. "We're all in the same boat," he said at a dinner attended by shale executives and Opec ministers. Barkindo skirted the issue of short-term shale growth and instead focused on bullish demand and concerns that weak global upstream investment could be sowing the seed for a potential supply gap down the road.

The shale and Opec rivalry has taken centre stage for global oil markets. For now, shale has the upper hand.